"The comfort of the rich depends on an abundance of the poor." ~ Voltaire
"If any man tells you he loves America, yet hates Labor, he is a liar." ~ Abraham Lincoln

Sunday, March 16, 2008

NAFTA & The Myth of Free Trade

John McCain recently indicated his position in the free trade debate and belittled his Democratic challengers by dismissing their reservations about and proposals of possible reform for the North American Free Trade Agreement (NAFTA). Yet, why should we trust McCain's judgment of NAFTA or anything closely resembling economics when he readily admits he doesn't understand the subject?

McCain went on to state, "The fundamentals of our economy are still strong." Huh? I think he's been on the campaign trail a bit too long. You don't have to have be an economics PhD to read the newspapers and grasp that our economy is headed in the wrong direction. Many parties and policies are to blame for this downturn. Reagan/Thatcher deregulation, lower taxation, and decreased protectionism; Greenspan/Rubin/Clinton continued deregulation, balanced budget obsession, and the dollar/stock/housing bubbles; and Bush's even lower taxation, deregulation, and costly and unnecessary war. So as we can see, there is a theme running through the last three decades and much of it is coming to a head.

In the 1980s we bailed out the savings & loan industry. Which, as Paul Krugman calculates, cost taxpayers 3.2 percent of GDP, or the equivalent of $450 billion today. Today, we're bailing out the cesspool that is the subprime mortgage industry. Both were caused by excessive deregulation and lack of oversight into the activities of what have become evermore-risky financial schemes. The U.S. has been on a steady path of lowering taxes on its corporations, tearing down trade restrictions (mostly to undercut labors' gains and their bargaining power), and removing any management and boundaries of standards of acceptable business practice. We're letting the foxes watch the hen house. All of this is done to please Wall Street-ers and to cook the books for acceptable quarterly returns for shareholders.

As Nouriel Roubini notes there now exists a shadow financial system, composed of conduits, money market funds, hedge funds and other non-bank financial institutions. "The Fed now can lend unlimited amounts to non-bank highly leveraged institutions that it does not regulate...By lending massive amounts to potentially insolvent institutions that it does not supervise or regulate and that may be insolvent the Fed is taking serious financial risks and seriously exacerbating moral hazard."

We've entered into an era of uber casino capitalism where rules and ethics no longer apply. Aided by bought-and-paid-for government policies, elite capital plunders and pillages the globe in search of higher returns. This is all claimed under the guise of creating jobs, advancing democracy, increasing wages, and advancing civilization. Yet all of these assertions are empirically and demonstrably false.

Alice Amsden, an MIT economist, has demonstrated that most of the successful Asian nations have violated every aspect of the law of comparative advantage on their path to economic success. Ha-Joon Chang, a Cambridge economist, has shown that almost all countries have used protectionist measures to protect their infant industries and to develop economically throughout time. Unadulterated free trade, virtually non-existent taxes, and the lack of any protectionist measures, as an economic development policy is a modern scheme. This is a ruse that is failing miserably. Developed countries grew at 3.2 percent during the 1960-1980 period. Their growth stalled to just 2.2 percent, from 1980-2000. Over this same time, developing countries growth decreased from 3 percent to 1.5 percent.

Alexander Hamilton, America's first treasury secretary, proposed measures to protect America's infant industries. Since 1791, up until the Second World War, the U.S economy grew behind huge tariff walls, with industrial tariffs ranging from 25 to 40 percent. Direct government participation and protection of industry resulted in the economic strength and maturity of the nation. "Within 200 years, when America has gotten out of protection all that it can offer, it too will adopt free trade," Ulysses Grant (civil war hero, U.S. president 1868-1876) commenting on U.S. trade policy with parallels to England's history of protection and their change in attitude to free trade when they saw that they had gotten all that protection could offer them.

The countries that have accomplished economic ascendancy have done so by fashioning policies to their own needs, not by following neo-liberal orthodoxy (aka The Washington Consensus). Today, China and India have tariffs ranging between 20 and 30 percent on manufactured goods. The productivity gap between rich (developed) and poor (developing) countries is much higher today than it was, so it only follows that tariffs should also be higher. The ratio of per capita income in purchasing power parity between the richest and poorest developed countries was, at most, four-to-one. Today the gap is around fifty-to-one. Today's developing countries will have to impose higher tariff rates than those used by developing countries in the past if they are to provide the actual same degree of protection to their industries. Infant economies cannot compete with mature ones. Free trade agreements between countries with vastly different levels of productivity cannot succeed over the long-term.

From 1993 (NAFTA's inception) to 2002, the U.S. lost 879,280 jobs due to the trade agreement. Wisconsin has lost 23,028 jobs due to NAFTA over this period. Productivity has risen by 48 percent since 1973, yet real hourly compensation has increase by only 20 percent. In 1973 manufacturing accounted for 24 percent of total U.S. employment, it is now only roughly 10 percent. Trade liberalization has been most hurtful to those without college degrees, whom have actually seen their wages decline.

The neoliberal experiment has failed. It's time for a new New Deal. Imagine that -- government restricting corrupt financial practices and putting the people back to work, whilst also initiating some new programs, legislation, and policies aimed at benefiting the majority of the population rather than a select monied few. As Stanley Kutler's recent article states, "The New Deal launched vast public works projects, expanding and improving the nation's infrastructure...More than eight million people working on one million projects, benefited from the program. The Roosevelt administrations enduring legacy came from its reform measures...the Social Security Act...legislation and regulatory commissions for banking, securities, communications, and labor practices." If only we hadn't spent the last three decades tearing apart these policies and legislation, much of today's horrible financial news and depressing economic conditions could have been averted.

And this also ties into immigration, obviously. First, although this is free trade and is supposed to be based on Ricardo's comparative advantage, which is supposed to lead to efficiency and productivity gains. But with the U.S. continually subsidizing farmers, we artificially lower the price of American agricultural exports and hurt developing countries. Such as Mexico, in one area where they can actually produce at a lower cost. Instead, our subsidized agri-business drives Mexican farmers off their land because of our low priced agricultural products. And, because of this, Mexican wages have actually fallen since NAFTA. Hmmm, I wonder where they might go to find better wages?